"{arb musings brought on by recent trying markets}

are there indicators, or rather a combination of indicators, that can dynamically, in real time, indicate when & to what degree, the pulse (volatility) AND the trajectory/gradient/slope (the intensity of the directional movement) of a market CHANGES?

seems to me that this will have to be something that evaluates the "very recent & current market condition" dynamically, on a rolling basis, relative to the average market condition over a suitably longer & long period...

further seems to me that what I`m actually asking is whether there is a way to get a heads up early in a move re the intensity & consistentency (& p`haps durability?) of the trend resumption/trend change; this could/should? be useful in selecting the appropriate timeframe & strategy/system to employ in trading?

lastly, seems to me that we are now in a (for now) very mild degree downtrend, but one with a rapid pulse (rapid oscillations); this may be a market condition to either (1) avoid, (2) scalp, or (3) trade on the basis of a much longer timeframe than usual, p`haps even with an entirely different MA-combo...

juz wundrin aloud... prolly a load of crap that I spew, coz I really know nothing about the stuff I`m enquiring about... but I find it interesting...

Surely one needs to change your method/strategy/system to entirely different market climates/moods?
but to do so timeously (& not after the horse has bolted), one needs to run a separate market climate diagnostic system to point you in the right direction, one would think?

what I`m really thinking is that there is prolly no system that works under all market conditions. & I have a problem buying into this backtesting thaang, unless one on objective, identifiable & defined bases distinguishes between sets of different, defined market climates, AND THEN backtests these identified different market climates separately, & tests & eyeballs which system works best for every separate market climate, having gone back in the data; then one could have, say, 3 or 4 different market climates, &, say, 3 or 4 correspondingly different strategies & systems to execute such strategies. These may, or may not, be very different, the one from the others...
Fact remains though, one would need to be able to identify real time when the market climate morphs from, say, winter to, say, spring...

this may sound ridiculous or very complex, but it isn`t: Hussman`s investment methodology (both for stocks & bonds, but separately, on different variables, for each asset class) works on the construct of 2 determining major variables, that may be either "favourable" or "unfavourable", & therefore gives rise to a set of 8 separate permutuations (market climates), 4 market climates for stocks, & 4 market climates for bonds.
Hussman does diagnostic tests FROM THE DATA for these various market climates on a continuous basis... And when there is a change in climate, he immediately changes his investment posture; this happens on objective, from-the-data-observable grounds, & is completely unemotional & non-discretionary. He can act thus because he has gone back in the data for many decades & observed the distinguishing features of the different climates; that has enabled him to define the different climates; & that enables him to identify the relevant climate in the current & recent data, & also when a climate change occurs. What`s more, having identified those different climates in decades of data, he has observed their range of outcomes, & determined the most probable outcomes of each such climate, & ergo the, on average, most appropriate investment stance to be taken in response to each separate market climate...

I was thinking, is it possible & executable to follow such a method when trading? & as mentioned right at the top of this note, which indicators may be useful for such purpose?

It seems to me to make so much sense, but would obviously involve lots of research & backtesting into data going back decades...

A ny trader that has any thoughts about this that he/she may be willing to share?
- I`ll appreciate."

[ Duncan McLeodFinancial Mail] While many consumers are fretting over which high-definition TV to buy, a new, low-power screen technology is already on the horizon. TVs that use “organic light-emitting diodes” could quickly consign today’s LCD and plasma technologies to history.

The pace of innovation in television is starting to rival the frenetic rate of development in the computer industry.

Today I am going to discuss a slight twist on an intermediate-term indicator that I’ve discussed before. The idea comes from Gerald Appel’s book “Technical Analysis – Power Tools For Active Investors”.In it he discusses a relative strength measure of the NYSE vs. the Nasdaq looked at on a weekly chart. The premise behind the indicator is that the market tends to perform better when the appetite for Nasdaq stocks is greater than the appetite for NYSE stocks.Part of this is due to the higher volatility of the Nasdaq, and part of it is due to investors willingness to speculate more aggressively when their outlook is positive. Critics of the indicator suggest the reason it works is largely due to the higher beta of the Nasdaq. That may be part of it, but it doesn’t mean the indicator is without value. In fact, whatever the reasons behind it, the indicator has been an excellent barometer over the years. In the book, Mr. Appel suggests using a 10-week relative strength indicator to measure this phenomenon.

Since I normally trade the S&P 500 and not the NYSE Composite, I applied the indicator to the S&P 500. Doing so, I found the results to be even better. The indicator is shown in the chart below.



The two lines on the bottom panel are the relative strength indicator. When the solid line closes above the dotted line that means the Nasdaq is leading the S&P. When it closes below the dotted line, that means it is lagging the S&P. To make it even easier to view I’ve made the line green when the Nasdaq is leading and red when the Nasdaq is lagging. As you can see, the Nasdaq is currently lagging.

The performance can be evaluated a number of ways. This first equity graph (courtesy of Tradestation) shows the points gained in the S&P 500 since June 30, 1972 – May 15, 2009.



As you can see, over the time period measured the S&P gained 1,341.27 points when the Nasdaq was leading. Meanwhile, the total points gained by the S&P over the period was 775.74. The Nasdaq held a leadership position just slightly more than ½ the time during the period. So almost twice the gains (points-wise) were achieved in nearly half the time. Not bad.

What if you started with a $100,000 portfolio and compared buy and hold to only holding when the Nasdaq led?

I decided to show these results in Excel.

These results represent returns from 4/19/1971 – 5/22/2009. They do not include dividends. The pink line is the growth of $100k in the S&P 500. The blue line shows the results of investing in the S&P only when the Nasdaq is in a leadership position and earning 0% interest otherwise. The yellow line shows results if instead of earning 0% interest, you managed to earn a steady 2.5% interest on your cash balance while not in the market. While 2.5% isn’t easily doable today, over most of the time period it was extremely low.

It appears the only period where the Nasdaq/S&P Relative Strength Indicator didn’t provide an edge was during the 1995-2000 boom market when you would have wanted to be invested basically the whole time.

The ending value differences are striking. By sitting out of the market when the Nasdaq is lagging and earning a minimal interest rate on your cash, returns more than tripled. Nearly $2,000,000 more would have been earned on an investment of $100,000.

The Nasdaq/S&P relative strength indicator is well worth keeping and eye on and is a useful tool for measuring the health of the market. I’ve recently added it as one of the weekly charts I track on the Quantifiable Edges members charts page.

I’ve also posted a few files on the free downloads section of the websitethat may be downloaded.

1) The 1st file is the Excel worksheet that shows exactly how the model was built and the returns calculated. It also includes the chart shown above. Anyone interested in using Excel for historical backtesting or modeling, or who would like to see exactly how the relative strength indicator was calculated, may find it useful.

2) The 2nd file is a zip file for Tradestation users. In the zip file is an eld with the indicator that you may apply to your charts and a strategy that will allow you to run your own tests. Also included in the zip file is a worksheet that has everything all set up. It was created in Tradestation 8.5 (build 2289). My understanding is that if you are using an older version of Tradestation the .eld should import fine, but the worksheet may not open properly. Therefore, after importing the .eld file you’ll need to set up your own chart to apply the indicator and strategy.

Anyone who is a subscriber, or has taken a free trial of Quantifiable Edgesin the past, or has registered prior to downloading the Daily Trading Coach Historical Patterns Sample Spreadsheetis already registered to access the free downloads section. If you don’t recall or don’t have a password, just enter your email address and click on the “Don’t know your password?” line below the login box and it will be immediately emailed to you.

Here’s a link to the free downloads page:

http://www.quantifiableedges.com/members/freedownload.php

"What would you do? You make the choice. Don`t look for a punch line,
there isn`t one.. Read it anyway. My question is: Would you have made the
same choice?

At a fundraising dinner for a school that serves children with learning
disabilities, the father of one of the students delivered a speech that
would never be forgotten by all who attended. After extolling the school
and its dedicated staff, he offered a question:

“When not interfered with by outside influences, everything nature does,
is done with perfection. Yet my son, Shay, cannot learn things as other
children do. He cannot understand things as other children do. Where is
the natural order of things in my son?”

The audience was stilled by the query.

The father continued, “I believe that when a child like Shay, who was
mentally and physically disabled comes into the world, an opportunity to
realize true human nature presents itself, and it comes in the way other
people treat that child”..

Then he told the following story:

Shay and I had walked past a park where some boys Shay knew were playing
baseball. Shay asked, “Do you think they`ll let me play?”

I knew that most of the boys would not want someone like Shay on their
team, but as a father I also understood that if my son were allowed to
play, it would give him a much needed sense of belonging and some
confidence to be accepted by others in spite of his handicaps.

I approached one of the boys on the field and asked (not expecting much)
if Shay could play. The boy looked around for guidance and said, “We`re
losing by six runs and the game is in the eighth inning. I guess he can
be on our team and we`ll try to put him in to bat in the ninth inning.”

Shay struggled over to the team`s bench and, with a broad smile, put on a
team shirt. I watched with a small tear in my eye and warmth in my heart.
The boys saw my joy at my son being accepted.

In the bottom of the eighth inning, Shay`s team scored a few runs but was
still behind by three..

In the top of the ninth inning, Shay put on a glove and played in the
right field. Even though no hits came his way, he was obviously ecstatic
just to be in the game and on the field, grinning from ear to ear as I
waved to him from the stands.

In the bottom of the ninth inning, Shay`s team scored again. Now, with
two outs and the bases loaded, the potential winning run was on base and
Shay was scheduled to be next at bat. At this juncture, do they let Shay
bat and give away their chance to win the game?

Surprisingly, Shay was given the bat. Everyone knew that a hit was all but
impossible because Shay didn`t even know how to hold the bat properly,
much less connect with the ball. However, as Shay stepped up to the
plate, the pitcher, recognizing that the other team was putting winning
aside for this moment in Shay`s life, moved in a few steps to lob the ball
in softly so Shay could at least make contact.

The first pitch came and Shay swung clumsily and missed. The pitcher
again took a few steps forward to toss the ball softly towards Shay. As
the pitch came in, Shay swung at the ball and hit a slow ground ball right
back to the pitcher. The game would now be over.

The pitcher picked up the soft grounder and could have easily thrown the
ball to the first baseman.. Shay would have been out and that would have
been the end of the game. Instead, the pitcher threw the ball right over
the first baseman`s head, out of reach of all team mates.

Everyone from the stands and both teams started yelling, “Shay, run to
first! Run to first!”

Never in his life had Shay ever run that far, but he made it to first
base. He scampered down the baseline, wide eyed and startled. Everyone
yelled, “Run to second, run to second!”

Catching his breath, Shay awkwardly ran towards second, gleaming and
struggling to make it to the base. By the time Shay rounded towards
second base, the right fielder had the ball. The smallest guy on their
team who now had his first chance to be the hero for his team. He could
have thrown the ball to the second baseman for the tag, but he understood
the pitcher`s intentions so he, too, intentionally threw the ball high and
far over the third baseman`s head.

Shay ran toward third base deliriously as the runners ahead of him circled
the bases toward home. All were screaming, “Shay, Shay, Shay, all the way
Shay!”

Shay reached third base because the opposing shortstop ran to help him by
turning him in the direction of third base, and shouted, “Run to third
Shay, run to third!”

As Shay rounded third, the boys from both teams, and the spectators, were
on their feet screaming, “Shay, run home! Run home!”

Shay ran to home, stepped on the plate, and was cheered as the hero who
hit the grand slam and won the game for his team.

“That day,” said the father softly with tears now rolling down his face,
“the boys from both teams helped bring a piece of true love and humanity
into this world.”

Shay didn`t make it to another summer. He died that winter, having never
forgotten being the hero and making me so happy, and coming home seeing
his Mother tearfully embrace her little hero of the day!

AND NOW A LITTLE FOOTNOTE TO THIS STORY:

We all send thousands of jokes through the e-mail without a second
thought, but when it comes to sending messages about life choices, people
hesitate.

The crude, vulgar, and often obscene pass freely through cyber space, but
public discussion about decency is too often suppressed in our schools and
workplaces.

If you`re thinking about forwarding this message, chances are that you`re
probably sorting out the people in your address book who aren`t the
`appropriate` ones to receive this type of message. Well the person who
sent you this believes that we all can make a difference.

We all have thousands of opportunities every single day to help realize
the “natural order of things.”

So many seemingly trivial interactions between two people present us with
a choice:

Do we pass along a little spark of love and humanity or do we pass up
those opportunities and leave the world a little bit colder in the
process? A wise man once said every society is judged by how it treats
it`s least fortunate amongst them.

You now have three choices:

1. Ignore and/ or Delete
2. Forward without thought
3. Wipe the tears from your eyes and forward.

May your day be a Shay Day."